But beware: If you’re not paying off the balance every month on your primary card, applying for a second card won’t help and could get you into trouble
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Dear Opening Credits,
I’m 20 years old and have just passed the one-year mark on having my first credit card! I am wondering when it is the right time to get another card. I have an $800 limit on this one and know getting a second credit card will help keep my utilization ratio low and build my credit. I pay off my full balance every month and have a steady source of income. — Kim
Something tells me that you either are or were a fantastic student. Clearly, you know the rules of the credit game and follow them carefully. It’s not always easy to do so. As you may be aware, millions of perfectly intelligent adults get into trouble with credit cards because they lose track of what they charge, or simply spend more than they can afford to repay quickly. Not you, though. So far, you’ve got it all under control.
More, you have a specific goal, which is to use the plastic you have now to create an even better credit profile for later. You’re correct about utilization and the way it affects your credit score. Here’s how it works, and what you can do to become a high achiever.
When most people refer to credit building, they mean establishing a long and positive pattern of borrowing and repaying money. The financial institutions that lend you money send the information about your accounts to the three major credit reporting bureaus (Experian, TransUnion and Equifax). Credit scores are derived from the financial information on those reports.
The most common score is the FICO, and it ranges from a low of 300 to a high of 850. Check yours now to see what they are. You can pull scores for about $20 each from myFICO.com. With just over a year of responsible use behind you, it may be pretty good already. An excellent score is considered to be in the mid-700s on up. Payment history is 35 percent of the score, so because you’ve been timely, you’re doing fine. Credit utilization (the ratio of how much you owe compared to your total credit limit) is next in line for importance, at 30 percent. Keeping the balance near zero is best (which is what you do!), but the general rule is to owe no more than 30 percent of your available credit line.
The length of time you’ve had credit, the types in use and the number of inquiries for more credit comprise the rest of your score. While you can’t speed up time, you can add another card to your wallet — as long as you don’t overdo the applications. Too many inquiries have a temporary negative effect on a FICO score.
If you believe that you can easily handle another credit card, go ahead and do so. With your FICO score in hand, you’ll know which cards are within reach. For example, your scores may be in the good range (around 650 to 750), so scan card offers available for consumers whose scores fall within that range. Or you may want to get a retail card at your favorite store or a gas card at the service station you use most.
A word of warning: The more cards you have, the more complicated credit management can become. Watch your statements and balances like a hawk. Then, keep doing what you’re doing: charging smartly and developing a gorgeous financial reputation.
See related: FICO’s 5 factors: The components of a FICO credit score